Banker Says City In Good Financial Position - Advises Borrowing
Despite Moose Jaw and the surrounding region being in an extended economic recession there is a lot of opportunity for the City, given the present market conditions and financial shape of the City itself, to safely borrow money and benefit from historically low interest rates.
That is the informed opinion of Greg McIntyre, senior commercial account manager with the Royal Bank of Canada and a past chair of the Moose Jaw and District Chamber of Commerce, who gave a presentation on the financial shape of the City of Moose Jaw based upon three main metrics or measures. The banker provided his report free of charge at Wednesday evening’s special Council meeting where the 2020 budget was finalized as a service to help add some extra information to the budget deliberations.
Those three measures were Operating Defecit or Surplus as a Percentage of Operating Revenue, Debt Burden and Reserves as Part of Operating Revenue. The three measures were things Council is able to influence based upon what decisons they make, to come to the best solution for Moose Jaw’s residents, McIntyre said.
Operating Deficit (Surplus) as a Percentage of Operating Revenue (ODPOOR) is the measure of comparing the revenue coming in versus expeneses. If revenue is greater than expenses expressed as a percentage is 10 percent then the municipality’s position is strong anything over 20 percent is considered very strong.
The revenues are adjusted to take out anonamlies such as land sales, interest earnings and large one-time contributions from senior levels of government.
For Moose Jaw the ODPOOR is 11.3 percent. By comparisson Regina is at 13.2 percent, Weyburn is at 16.1 percent and at the other end of the measure North Battleford is at -1.3 percent.
“Generally speaking we want to have our revenues exceed what our expenses are. We don’t want to have more expenses than revenues because obviously we are going to be able to operate into perpetuity,” McIntyre said, adding the benchmark for a city like Moose Jaw to be considered stable and strong would be 10 percent.
“Ten percent the City is in very good shape,” he said.
Debt Burden Ratio (DBR) is the percentage of Operating Revenue to fund annual obligations. The benchmark ratio to be considered in a strong position is less than 15 percent.
The Debt Burden Ratio for Moose Jaw is 8.3 percent whereas the Province of Saskatchewan and Estevan are at 17.3 percent. The city with the best debt burden of all cities listed in the report was Weyburn at 0.1 percent.
Reserves as a Percentage of Operating Revenues (RPOOR) is a ratio where the percentage of reserves held allows a municipality to weather an economic storm. A city with a percentage over 25 percent is in a very strong position.
The RPOR for Moose Jaw is 52.9 percent with Weyburn having the best RPOOR at 103.3 percent and Regina with the lowest at 29.9 percent.
“When you take into consideration all of those factors ( ODPOOR, DBR and RPOOR) the City of Moose Jaw has a very large capacity to borrow,” McIntyre said adding given the long term lower interest rates the City could presently access when combined with the investment returns reserves may earn makes borrowing the preferred option.
“The City of Moose Jaw has a large capacity to borrow. At the moment the interest rates on long term borrowings at a spot rate is somewhere aroung that 2.8 or 2.85 let’s say less than three percent. As the City of Moose Jaw has expanded and improved its investment strategy there is a good chance in the current climate right now the reserve funds can actually outperform the interest rate. That is the main crux I want to leave you guys with.”
McIntyre went in to state given the low long term interest rates the City of Moose Jaw can access it made sense to look at borrowing right now and not using reserves to finance the city.
”While the rates are 2.8 percent and there is some opportunity to potentially out earn that on the reserves the day will come when the interest rate on borrowing is going to be a barrier to borrow and that is when those reserves are going to come in real handy,” he said.
McIntyre attempted to silence some of the critics - including his dad - that borrowing now in a period when interest rates were at a 100 year low made sense when investments earned more than the interest paid on borrowing. He said the advice he was giving would not apply to the high interest rate environment of the 1980s and in five years time would likely be outdated as economic factors would likely be different.
One of the economic factors he mentioned in his presentation is areas outside of the two major centres - Saskatoon and Regina - have been in an extended economic recession of 24 months or longer. A recession is defined as two consecutive quarters (six months) of negative economic growth. Recessions have no definitve length but most on average last a year. The underlying economic factors causing the recession ultimately dictate how hard and long the recession will be.
“...we have some fairly detailed reports within RBC that go into more RMs and surrounding areas it should suggest as though outside of Regina and Saskatoon the majorty of the province has been going through 24 or more months of an actual recession.”
Despite the regional economic recession McIntyre said “I would say based upon these three metrics there is a lot of moosepower ah horsepower the City can rely upon.”
Mayor Sees Strength While Cruising The Downtown Core
Mayor Fraser Tolmie said he welcomed the report as it added to budget discussions.
He went to great lengths to make sure people understood the report had not been paid for by the City and during the discussion McIntyre’s employer would not directly benefit from the presentation.
Mayor Tolmie said he saw economic strength by simply driving up Main Street. In a drive up Main Street the Mayor said what he saw was economic strength given he saw only four buildings displaying For Sale or For Lease signs.
“I took some time today to drive up Main Street and I went from Manitoba Street all the way up to Ross and I wanted to see how many storefronts that there were lease signs and for sale signs and from Manitoba all the way up to Ross Street I noticed there were four vacancies...for the efforts we have been making with the Downtown Business group strengthening our Downtown core that looked very positive to me. ”
Councillor Not Convinced On Borrowing
Following the presentation Councillor Swanson had an exchange with McIntyre opposing his advice for the City to consider borrowing.
“Just to be clear as a banker you are saying I can borrow a whole bunch more money?” Councillor Brian Swanson asked.
“Yeah do you think there is something odd about that? I get your point,” McIntyre replied.
“What I think about that is I am not very keen in borrowing a bunch more money for the City of Moose Jaw and I don’t think it benefits the City of Moose Jaw it might benefit the bank but 10 years ago we had no debt and the people who are saying you can go into debt and don’t worry about it. I am not one of them and I represent a whole bunch of people who don’t like the idea of taking on a whole bunch of debt too,” Councillor Swanson said.
“I know exactly where you are coming from,” McIntyre replied.
“Like your dad,” Councillor Swanson said.
“Like my dad exactly. You are chanelling my dad too. The majority of the constituents you would represent on that point of view absolutely that is a fair concern. But they in their borrowing lives were never able to lock in an interest rate like a city can. So the City has an unparalled leverage to lock those things in for a long period of time that us as individuals, unless we are very well healed individuals, we cannot access those types of things,” McIntyre replied.
“Currently this is what the math is telling us now. This same advice maybe in five years is not good advice.”
The report was received and filed in a 5 - 1 vote with Councillor Swanson opposed. Councillor Chris Warren was absent for the presentation but showed up late due to unforseen difficulties for the remainder of the meeting.
To read the entire written report Click Here.